Lloyds (LSE:LLOY) shares are trading around 40p and are down 20% over the past 12 months. In fact, the blue-chip stock had been pushing upwards until the (now former) chancellor’s mini-budget in late September.
The new government spooked markets, and Lloyds is one of the shares worst hit. But with the stock down 17% over the last month. So should I be buying Lloyds shares?
What’s been moving the share price?
Recent downward pressure on the share price has been almost entirely caused by the new government and its attempts to get the UK economy moving.
The ex-chancellor’s unfunded tax cuts and spending plans requires more international borrowing and the news sent the pound falling to its worst position against the dollar in decades.Â
It’s also concerning because fiscal and monetary policy aren’t working in harmony. And current forecasts are suggesting that interest rates might have to reach as high as 6% in an effort to bring inflation under control.
Higher interest rates are good for banks, but the swift response of the Bank of England has resulted in many financial institutions reducing the number of financial products on offer.
Bank shares also tanked after reports that prime minister Liz Truss had looked at changing the Bank of England’s money-printing programme to save the UK taxpayer billions of pounds.
And then on Thursday, reports emerged that officials were planning a U-turn on the mini-budget. The stock jumped 5%. They rose again on Friday.
Could the Lloyds share price really double?
Lloyds shares last traded around 80p — double today’s value — in 2015. Banks like Lloyds are often seen a reflection on the health of the UK economy. And as such, share price growth has been hard to come by amid concerns around Brexit and the pandemic.
But Lloyds is actually performing rather well right now. In July, the bank said that net income had surged 65% to £7.2bn for the six months to 30 June. And with higher net interest margins (NIMs) — these are very important to profitability — we can expect profits to remain in excess of where they have been in recent years. In fact, for the past 14 years, interest rates have been near zero.
With recent performance positive but a fairly negative investor sentiment, Lloyds is currently trading with a very low price-to-earnings (P/E) ratio — just five. By comparison, HSBC — which is more Asia-focused — trades with a P/E of eight and Bank of America has a P/E of 10. The latter generally reflects the more positive investor sentiment in the US.
There are two main reasons why I think the Lloyds share price could reach 80p over the next five to 10 years.
Firstly, I see the bank as being undervalued. It’s certainly not that exciting as it focuses on the UK mortgage market. And the P/E isn’t in line with other more exciting banks. I expect investor sentiment to improve in the coming months, especially if earnings remain at their current levels.
Secondly, we appear to entering an era of higher interest rates with inflation expected to remain higher in the long run. Higher NIMs will be a huge boost to banks like Lloyds. As such, I’m buying more Lloyds shares in the hope of long-term gains.